What are tax credits?

Tax credits are a kind of benefit that the government pays to people, either:

• if you have children, and/or
• you earn under a certain amount

This means there are two different types of tax credit – working tax credit and child tax credit.

Tax credits are ‘means tested’ – which means the government considers your financial circumstances (including how much you earn and how much you have saved) before deciding how much you can get.

You can either claim by yourself or with a partner. If you claim with a partner, your combined income and circumstances will be means tested.

Tax credits are usually paid directly into your bank account every 4 weeks, by a direct payment.

Why might a tax credit overpayment happen?

Overpayments usually happen because of the way that HMRC works out your tax credit entitlement. How much they think you should be paid is based on your financial circumstances the last tax year.

The tax year runs between 6 April and the following 5 April. So, HMRC will look at your circumstances for this period to decide how much you’re going to be entitled to for the following 12 months.

If this estimate is too low, they could end up paying you more that you’re officially entitled to.

Other reasons for tax credit overpayments

Underestimating your following year’s financial circumstances is the most common reason tax credits are overpaid – but there are other reasons.

Late reporting

If you leave it too late to tell HMRC about a change that causes your entitlement to drop, you could get an overpayment. Typical changes might include changes in working hours or a child leaving full-time education.

Under-estimated earnings

If you underestimate how much you’re going to earn for the year, you might end up being paid too much working tax credit.

HMRC delays

If HMRC take too long to process changes they’ve been informed of, they may end up paying you too much.

Claimant error

If you make a mistake on a tax credit claim or renewal form, you could end up with tax credit overpayments.

HMRC error

If HMRC make an error (whether that’s a system problem or a human error) with their tax credits system, you may end up with more than you’re entitled to.

HMRC investigation

HMRC sometimes starts investigations if they feel like someone has tried to misrepresent their circumstances to claim more than they’re entitled to.

Late renewal forms

If your claim form or renewal form is sent to HMRC late, they may end up working off out-of-date information and therefore make a tax credit overpayment.

Do you have to pay back tax credit overpayments?

In short, yes, you have to pay back any tax credit overpayments that have been made.

As far as HMRC are concerned, if you’ve been paid something that you’re not entitled to, it will need to be recovered from you.

As you can see, there are numerous reasons why you might get tax credit overpayments – from HMRC mistakes right through to investigations around possible fraud.

Unfortunately though, it doesn’t matter who is to blame for your overpayment. Whether it’s a problem with the info you give HMRC or something they’ve done wrong, you’ll still be expected to pay any overpayment back.

Not sure why you’ve been overpaid?

Sometimes, a claimant (the person who’s getting the tax credit) will notice that they’ve been (or are being) overpaid. In other cases, the Department for Work and Pensions (DWP) Debt Management team will send you a letter to let you know.

The DWP will usually be the department to get in touch – even though the calculations are done by HMRC.

If you’ve been told that you have tax credit debts but you’re not sure why, you’re within your rights to ask for an explanation. There will be contact details on the letter you’ve been sent – so give them a call and ask for an explanation.

Even if they explain over the phone, it’s a good idea to ask them to explain what’s happened in a letter. This gives you an official record of the problem and makes it easier to show what’s happened if you seek professional debt advice.

What should you do if you notice a tax credit overpayment?

Most of the time, it’s HMRC who notice tax credit overpayments – but you may notice yourself, especially if your circumstances have recently changed.

A change in circumstances could be something as simple as having your contacted hours increased at work, moving in with a partner, or a child leaving home or full-time education.

If you notice that you’re getting an overpayment, it’s a good idea to act quickly. Recent cost of living increases might make it tempting to hold on to the overpayment for now – but you will have to pay it back, and the DWP could even use a debt collection agency if it’s not paid back as quickly as they wish.

Can I appeal the overpayment debt decision?

If you’ve had an explanation about the overpayment but still don’t agree, you can formally ask HMRC to review it.

You’ll need to contact them to ask for this review. You can call the tax credits helpline on 0345 300 3900 – or you can complete and return a tax credit overpayments form (TC846) which you can download from the GOV.UK website.

You usually have around 3 months to make an appeal. It’s worth knowing that HMRC can continue to reclaim your overpayments through your future payments, even if they’re reviewing your dispute.

How long do I have to repay the debt?

As a rule, HMRC say that tax credit claimants that have been overpaid have 30 days to repay the debt.

Don’t worry though, since some overpayment debts can be large, they’ll almost always be willing to discuss a repayment plan with you. If you don’t think you’ll be able to make the full repayment within 30 days, let the DWP or HMRC know as quickly as possible.

You can call HMRC on 0345 302 1429 if you need to let them know.

What are your repayment options?

When you talk to HMRC or the DWP about a tax credit overpayment debt, they’ll usually offer a range of possible repayment plans.

What they’ll talk to you about depends on the amount you owe, but typically the options will include:

Repayment over 12 months: You’ll usually be allowed to pay the amount back over 12 monthly instalments. If you choose this option, they generally won’t ask for any more information.

Repayment over a period between 1-10 years: If the amount isn’t manageable over 12 months, you’ll usually be given the opportunity to repay the debt over a period of of up to 10 years.

As long as you can pay back more than £10 a month or pay the debt off totally in 3-years or less, they usually won’t ask to see any more information. If you can’t pay £10 a month, they might ask to see a monthly budget to help decide how much you can afford.

Repayment over 10+ years: If you can’t realistically pay more than £10 a month, it’s likely that you’ll need a very long time to repay what you owe. Because of this, HMRC will usually ask to see a monthly budget to help you find a repayment amount that’s affordable over 10 or more years.

Is there any chance that a tax credit overpayment will be written off?

Unfortunately, it’s extremely unlikely that any overpayment will be written off.

It’s not totally impossible though.

If you prove to HMRC that you can’t afford to pay more than £10 a month and it’s likely to take more than 3 years for you to pay, they might first agree to put the debt on hold for 12 months.

They’ll do this so they can look again at the debt in 12 months and see if your financial situation has changed for the better. If it has, they’ll talk to you again about what you can afford then. However, if you still can’t afford to make any repayment – HMRC may agree to write off the debt.

Could the debt be written off after 6 years?

When you explore writing off debt online, you’ll often see people talk about a 6 year period – after which some debt is considered to be ‘written off’.

The trouble is, it’s not quite as simple as sitting-it-out with the DWP.

The 6-year period people talk about is relates to ‘The Limitation Act 1980‘. This is a section of UK law that sets out rules for how long someone can take legal action to recover money they are owed.

According to the act, certain debts become ‘statute barred’ after 6 years. Not all debts are covered by this 6-year timeframe, but debts owed to the DWP are included.

So, why aren’t the overpayment debts written off?

It all comes down to how much power the DWP have when it comes to recovering the debt. Like any other creditor (someone you owe money to), the DWP can chase you directly and get a debt collection agency to help – but they can even go a few steps further, taking money that’s owed to them from future payments you get from them.

This means that even if you can’t or won’t pay, they can carry out something called ‘direct earnings attachment’ (DEA) to collect the money from your wages – or even a ‘cross claim recovery’ – taking money owed back from universal credit payments or other benefits you might receive.

So, in theory, the debt could be considered statute-barred after 6 years – but it’s extremely unlikely that the DWP wouldn’t have taken action to get the money back well before that.

Are there any other ways to write off tax credits overpayments?

As you can see, there’s no loophole that will see any overpayment of tax credits written off – and you would have to be in significant financial hardship for at least a year for HMRC to even consider writing off what you owe.

It may be possible to write off some or all overpaid tax credit payments if you explore a suitable debt solution though.

For instance, debts owed to HMRC or the DWP can be included in an Individual Voluntary Arrangement (IVA). An IVA needs to be set up by an insolvency practitioner (IP) and approved by most of your creditors – but if it is, the IP will take over handling your creditors and you’ll make one comfortable monthly repayment.

Your monthly repayment will be split between each of the creditors you owe – but, when the IVA comes to an end, anything left unpaid will be written off and you’ll be free to rebuild your finances again.